Broker error blamed for Kraft share price surge

US exchanges
were forced to cancel erroneous trades in Kraft on Wednesday, just one day
after the company fled NYSE to re-list as two separate companies on Nasdaq OMX.

After opening
the day at US$45.55, shares in Kraft jumped as high as US$58.54 in a matter of
seconds. The sudden rise compelled six US exchanges to review and cancel trades
priced above US$47.82, as per SEC rules.

“Trading in Kraft was affected
by a broker error that impacted multiple stock exchanges. Nasdaq’s systems
performed normally and the industry’s process for handling these issues worked
as intended,” said a Nasdaq OMX spokesperson.

Under SEC
rules, trades in stocks
priced between US$25 and US$50 will be considered erroneous if they deviate by
5% from the circuit breaker trigger price.

However, circuit
breakers only come into effect after the first 15 minutes of continuous
trading, something the SEC has been urged to revisit following a glitch which caused market maker Knight Capital to lose US$440 million shortly after the
open of trading on 1 August. The fact that the erroneous Kraft trades were a
result of a broker error also suggests pre-trade risk controls – mandated
by the SEC following the 6 May 2010 flash crash and also a point of contention
during the Knight glitch – may not have been properly operating.

On 1 October,
Kraft completed the switch of its listing from NYSE Euronext to Nasdaq OMX
after a reorganisation of its business into two separate firms – Mondelez
International and Kraft Foods Group.

The company said
the decision to list the entities on Nasdaq OMX would “yield greater cost
efficiencies, while providing visibility advantages for the company's iconic
brands”.

Fragile markets

The incident is
yet another stain on the faltering US market structure, which has been subject
to a number of high-profile failures this year.

In May, the
hotly-anticipated IPO of social media company Facebook was delayed by 20
minutes after Nasdaq OMX experienced technology troubles preventing it from
setting an opening price, while BATS Global Markets was forced to cancel its
IPO – the first on its own brand-new listings service – after a software fault.
There have also recently been a number of instances where exchanges have been required to
break trades, such as on 22 August, when the share price of Peet’s Tea and
Coffee rose by almost 5% in a matter of seconds.

On 2 October,
the SEC held a market technology roundtable to assess the issues that continue
to plague US markets since the flash crash.

“There
are issues around market structure and the conduct of market participants that
we should further examine, including the high volume of cancellations, a
proliferation of order types, transparency, high frequency trading generally,
potentially manipulative trading strategies, and data latencies for public
investors – to name a few,” said SEC chairman Mary Schapiro. “These issues
still require attention and we are committed to addressing them.”

Schapiro
also suggested the recent IPO failures were a result of “basic technology
101 issues” rather than complexities or fragmented markets.